Citi fetes Apple’s potential on its 39th birthday

SAN FRANCISCO (MarketWatch)—What do you give the richest company in the world for its birthday? An adulatory analyst report and a spot on a coveted buy list are good places to start.

As Apple Inc.
AAPL, +1.99%
turned 39 on Wednesday, Citi analyst Jim Suva published an upbeat note that laid out the reasons why the stock will shake off its March doldrums to trade higher in the second quarter.

“We believe that the share price of AAPL will move up in absolute terms in the next 3 months based on the last closing price of $126.37 [on Monday],” said Suva.

“Our global due diligence assessing both demand and supply reveals consensus is underestimating both the continued demand for iPhone 6 and iPhone 6 Plus as well as the demand for the higher memory density phones,” he said.

Citi

Six months after the launch of the new iPhones, many vendors are still selling out on 128-gigabyte models, underscoring the strong appetite for devices with larger memories fueled by increased use of apps.

Apple Pay and Apple Watch, although in their nascent stages, could also result in additional revenue stream if Apple follows through with innovative improvements.

“The reason we view Apple Watch as a bonus potential catalyst is we are not impressed with the one day battery life or lack of built in GPS and look for Apple to make enhancements to eventually address these concerns, albeit likely in the second generation of Apple Watch,” said Suva.

The company is expected to sell as many as 1 million Apple Watches in its opening weekend, putting it on track to sell up to 2.3 million units in the June quarter, according to PiperJaffray analyst Gene Munster.

“We believe the company will beat consensus sales by at least $1 billion and iPhone unit shipments by at least 5% and at least a 2% EPS beat versus consensus,” he said.

Apple, which is slated to announce fiscal second-quarter results on April 27, is forecast to report earnings of $2.12 a share on revenue of $55.45 billion, according to a survey of analysts by FactSet.

Suva also expects the iPhone maker to announce an increase in its stock buyback program to $120 billion from $90 billion and at least a 10% hike in dividend from the current 47 cents.

Apple’s stock fell 0.4% to $123.94 Wednesday after dropping 3.1% in March, its first monthly slide since December.

For 2015, the stock rallied 12% and soared 60% over the past 12 months, making it one of the best S&P 500 performers. But there is still room for the stock to climb, according to Suva.

“Apple stock is not expensive as it trades at 14 times forward earnings or 11 times excluding cash of $25 per share and we note the S&P500 is trading at 17 times forward earnings,” he said.

The analyst reiterated his buy rating on Apple’s stock and target price of $145 and added it to Citi’s U.S. Focus List, composed of the financial firm’s “high conviction” stocks.

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